Risk 5 - Managing Risk in an Architectural Firm

Updatewd Feb 2017This is the fifth of six articles giving an overview as follows:

1. The Basics of Risk Management
2. Identifying Risk within the firm
3. Identifying Risk external to the firm
4. Assessing and quantifying Risk
5. Allocating, Transferring and Mitigating Risk
6. Risk Management Checklist (interactive tool)

Allocating, Transferring and Mitigating the Risk.

Allocating the Risk The central issue is to consider whether the risk attaching to your involvement in the project is appropriate under the circumstances, and whether it can – or should – be carried by others.Shifting Risk Through Contract LanguageWhat exposures are inherent or unique?Who has the greatest capability of managing each exposure?What power or authority is needed to manage such risks?What is the contractual cost for shifting the risk?Clients often demand that risks be shifted away from them to the design professional or contractor. Because of litigation possibilities within the construction industry, many parties attempt to contract without risk, regardless of true responsibility.The logical principle is that each risk should generally be borne by the party best able to control it and insure against it. Duties and liabilities must be accompanied by the ability to carry out the duties and thus master the risk.Parties to a contract should recognise and acknowledge their respective duties and have the ability to fulfil them.In a project where the risk is inherent in the type of project (unusual or unique), or is subject to external events (speculative or politically dependent) the client is probably the most appropriate party to retain the risk.Allocation of risk should be accompanied by an allocation of control and an adjustment in compensation.The following key enquiries need to be made when considering this issue

• Is the contract for engagement a standard (NZIA/ACENZ/DINZ) form?
• If so, do any project specific aspects alter your potential liability?
• If not, why not? Is that negotiable?
• If obliged to accept a non-standard form, carefully “benchmark” it against a standard to identify potential liability issues.
• Is the project procurement methodology (including the terms of the contracts) standard?
• If so, do any project specific aspects alter your potential liability?
• If not, why not? Is that negotiable?
• If obliged to accept a non-standard methodology, carefully “benchmark” it against a standard to identify potential liability issues.
• In respect of the other project participants (principal, consultants, contractors):
  • Do they understand and accept their project risks?
  • Do they have the individual and collective capacity to manage them?
  • Are they better able to manage the risks which would otherwise attach to you?
  • To what extent do their terms of appointment, scope of work, involvement in the project, and relationships to you affect your liability?
• How will foreseeable future circumstances affect your potential liability exposure?
• Under all the circumstances, is the extent of your potential liability exposure reasonable and acceptable?

Transferring the Risk Insurance is a risk funding mechanism that allows for the transfer of risk to an insurance company in exchange for the payment of premiums by the insured.Professional liability insurance allows design professionals to transfer some of the financial risk of being liable to a client or third party as a result of their negligence in performing and furnishing professional services.There are two kinds of policies for professional liability exposures: Professional Indemnity Insurance policies and Project Insurance policies.The Professional Indemnity (PI) Insurance policy best known to members is that offered to you by NZACS. This is an annual group policy tailored for the architectural profession and provides a number of extensions which members can take year by year.It is important that at each renewal date members review their policy terms, their level of cover, and extensions.A project insurance policy covers the risks of all design professionals involved in a specific project for a specific period of time including a "discovery" period following substantial completion.Although the project policy is issued through the prime design professional, the cost of this policy usually is an expense reimbursed by the owner.Mitigating the Risk Avoiding risk by avoiding specific clients or types of projects is difficult for most firms to accept.Accepting risk - gambling on one's ability to manage risk, or that the compensation is worth the risk, or that the identified possibility is not probable - is a course of action few firms knowingly take.Accepting some risk is inevitable, but it can be mitigated by:

• Maintaining open and active lines of communication.
• Fully informing clients, consultants and contractors about the options and consequences of the decisions required of them.
• Following up decisions by confirmation of what was decided, what is required and by whom, and the actions you are taking in response.
• Recording decisions about regulatory matters, design, materials, and budgets so that later investigations by others can see the reasons and considerations which lead to the outcomes.
• Ensuring that the tasks, obligations and responsibilities required of the firm are clear and unambiguous.
• Recording changes to project circumstances or decisions in such a way that the original reasons, and the reasons for the change, can be retrospectively identified and compared.
• Adding special skills and resources to a project team, or giving the project team greater control over the factors that might lead to a difficulty.
• Addressing differences of opinion or disputes as soon as the necessary information is available to do so.